Support and Resistance

A support level is the price at which buyers are expected
to enter the market in sufficient numbers to take
control from sellers.

The market has a memory. When price falls to a new Low and
then rallies, buyers who missed out on the first trough will
be inclined to buy if price returns to that level. Afraid of
missing out for a second time, they may enter the market in
sufficient numbers to take
control from sellers. The result is a rally, reinforcing
perceptions that price is unlikely to fall further and
creating a support level.

A resistance level is the price level at which sellers
are expected to enter the market in sufficient numbers to
take control from buyers.

When price makes a new High and then retreats, sellers who missed
the previous peak will be inclined to sell when price returns to that
level. Afraid of missing out a second time, they may enter the market
in numbers sufficient to overwhelm buyers. The resulting correction
will reinforce market perceptions that price is unlikely to move higher
and establish a resistance level.

Support levels, once penetrated, frequently become resistance
levels and vice versa.

The market logic is fairly simple: buyers who purchase near a support
level, only to see price fall, are likely to sell in order to recover their
losses, when price rallies to near their break-even point. The support level
then becomes a resistance level.

Likewise, stockholders who sell when price approaches a resistance level
will be disappointed if price penetrates the level and continues to rise.
They will be inclined to buy if price returns to near the support level,
fearing that they may miss out a second time. The resistance level thus becomes
entrenched as a support level.